SMCR one year on: What impact has the regime had on advice?

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SMCR one year on: What impact has the regime had on advice?

When major new regulations are introduced, it is often hard to predict all of the consequences that will follow, even if the regulations have already been implemented elsewhere in the same industry.

The Senior Managers and Certification Regime has been in force for banks since 2016 and for insurance companies since 2018, but has only applied to solo-regulated companies since December 2019. A year on, what impact has it had, if any?

The key changes the SMCR introduced are a clarification of the accountability of senior managers for the conduct of the business and its employees; and the replacement of the old Approved Persons Regime with a new Certification Regime.

Companies, not the regulator, now bear responsibility for approving the competence and good conduct of certified persons. Companies must document decisions, actions and accountability to prove compliance with the SMCR, which can come to the fore in the event of a regulatory investigation.

They must be able to prove that senior managers have taken all “reasonable steps” to comply with SMCR requirements.

Key points

  • A year ago SMCR took effect for advisers
  • Many have responded positively to the rules
  • It has raised regulatory issues they may not have attended to before

My colleagues and I work directly with advisers, helping them and other financial sector companies to improve their governance and risk management.

From our perspective, advisers appear to have responded positively to the SMCR in general, although there are still some issues for individual companies to resolve and some broader risks that every business must try to avoid.

The unprecedented social and economic disruption caused by the coronavirus crisis in 2020 has certainly had an impact on what “reasonable steps” look like for senior managers.

In September, in recognition of the additional problems faced by solo-regulated companies during 2020, the Financial Conduct Authority asked the Treasury to create a statutory instrument that would delay the deadline for these companies to undertake the first SMCR assessment of certified persons. The Treasury agreed and the deadline was moved from December 9 2020 to March 31 2021.

But even as this extension was granted, the FCA also made it clear that companies should still be working towards completing these assessments and ensuring compliance with the SMCR, in part because the events of 2020 have made the need for effective regulation even more urgent.

Consumer risks

These are precarious economic times, when poor advice or mis-selling would have even more serious consequences for advisers’ customers.

Decisions taken in relation to pensions, investments and other financial assets have become even more critical, and advisers have a hugely important role to play to help individuals make informed, balanced decisions.

In difficult times more people may be tempted to invest in too-good-to-be-true schemes, outright scams, or regulated but high-risk products that may not be suitable for their needs.

If we see an increase in poor outcomes in the future, we can surely expect an increase in regulatory investigations – making it even more important that companies can prove compliance with the SMCR.

In conversations with our clients, we have seen first-hand how the introduction of the new regime has had a positive impact on some solo-regulated businesses. We are now more likely to be asked to help senior managers define and review the “reasonable steps” they should take to ensure compliance.

They are asking constructive questions about their own companies: asking if their documentation is fit for purpose, for example, or what they can learn from customer complaints or poor customer outcomes. This questioning and the process of continuous improvement are exactly what the SMCR is supposed to encourage.

We are also aware that when companies have identified employees who have failed to meet the standard for certification, action has been taken to address this, including additional technical training and training related to conduct and culture. If the SMCR did not exist, I am not altogether sure these additional actions would have happened.

Further evidence of the SMCR having a positive impact may be visible in data related to FCA investigations into defined benefit pension transfer advice.

This data, obtained by Duff & Phelps via a freedom of information request, shows the number of such cases opened by the FCA has risen in 2020, while the number of complaints being upheld in the customer’s favour has fallen slightly over the same period.

That suggests FCA action is having an impact, although further data will need to be studied to verify that this is the case.

Potential pitfalls

Yet there are also still some potential problems and risks related to the SMCR that advisers must take care to avoid. Some companies have taken the view that the need to comply with this and other regulation means the amount of documentation the business produces – around the suitability of advice, affordability and background information – should increase dramatically.

Good documentation is vital, but companies must guard against the risk of a tick-box mentality emerging, where the sheer volume of data being collected can end up obscuring analysis of that data.

We are suggesting to some of the advisers we work with that sometimes less is more: sometimes concise, clear documentation setting out the facts is more effective. This applies to both internal documentation and the documents they are asking their clients to read and complete.

The other important risk of which both advisers and the FCA should be aware of is the danger that the resources required to ensure compliance with regulation make it too difficult to offer advice in a cost-effective way.

There is a risk that if the bar is set too high, this will mean that obtaining independent financial advice becomes more difficult for those people who are most in need of it.

But overall, despite the difficult operational conditions created by the pandemic, there have certainly been some notable positive developments during the past 12 months.

The new regime appears to be encouraging better decision-making and leading more senior managers to ask pertinent questions about business processes and advisers’ conduct.

That momentum must be maintained. We know the FCA will increase enforcement activity if the industry appears to be moving only sluggishly towards the outcomes the regulator wants to see.

This was the case in 2019 when the regulator vowed to increase its supervisory focus on conduct rules under the SMCR following the discovery that three years after the regulation was introduced for banks, some senior managers were still unsure of what was expected of them and their staff.

That should serve as a warning that the regulator may ask difficult questions of advice companies that fail to put their own houses in order.

Yet, it is also possible that another positive result of the SMCR implementation in banks may be repeated in the advisory space. Some of the senior managers in banks who complained most vociferously about the introduction of the SMCR in 2016 then came back to tell us, two years later, that they were actually benefitting from some very positive effects the regulation has had within banks, particularly in the way it has increased clarity around accountability.

I suspect that while it might not always feel like this, that there are already some managers working in advice companies who feel the same way about the impact of the SMCR on their industry.

Mark Turner is managing director, compliance and regulatory consulting, at Duff & Phelps